E Old Republic International: Undervalued Insurance Stock

Insurance stocks can be highly rewarding investments over time. Insurance companies make money in two ways. Not only do they earn money from premiums on policies they write, they also make profits from investing the accumulated premiums that have not been paid out as claims.

Old Republic International (ORI) is a highly profitable insurance stock that has generated steady growth for many years. It has also raised its dividend for 38 consecutive years. Today, ORI has a 3.5% dividend yield, and the stock has a low valuation. As a result, ORI is one of the best insurance stocks of 2019.

Business Overview

Old Republic was founded in 1923 and today the stock has a market capitalization of $6.3 billion. ORI underwrites and provides risk management services for a variety of general and title insurances. ORI has a diversified customer base, having diversified itself in recent years by reducing exposure to the financial and energy industries and increasing its base of transportation industry clients. A diversified customer base, increased premiums written, and higher growth from investment income have fueled steady growth for ORI in recent periods.

ORI reported strong quarterly results for the 2019 first quarter. Revenue of $1.5 billion increased 2% year-over-year, and beat analyst estimates. Earnings of $0.40 per share also beat expectations. Growth was two-fold—premiums and fees earned increased 2%, while net investment income increased 6% for the quarter. Book value per share, one of the most important valuation metrics for an insurance stock, increased 13% from the first quarter of 2018.

ORI is expected to grow earnings per share by 2%-3% in 2019. Since 2013, the company has increased EPS at a 7% annual rate. Investors have the opportunity to buy ORI stock at a relatively attractive price. ORI shares trade for a P/E ratio of just 12x right now, a fairly low valuation multiple for a highly profitable and growing business.

ORI is also an attractive dividend stock. The company has a current dividend payout of $0.20 quarterly, or $0.80 per share annually. The yield on the stock is 3.5% right now, which is highly attractive as the broader S&P 500 Index yields just 2% on average right now. Importantly, ORI’s dividend is secure. The company has an expected dividend payout ratio of approximately 42% for 2019. A dividend payout ratio below 50% means the company is distributing less than half of its earnings, a comfortable payout ratio that leaves room for continued dividend increases in the years ahead.

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